Question

William and helen are a common law couple who contribute regularly to their rrsps. william's annual contribution limit is $10,000, while helen has a limit of $4,000. william will have a higher marginal rate than helen in retirement in 10 years' time. if william contributes $10,000 to helen's rrsp, what benefit will the couple realize?

a. the benefit will be realized in retirement because withdrawals will be taxed at helen's lower marginal tax rate.
b. william can make an additional $10,000 contribution to his own rrsp in the current year.
c. if helen withdraws the $10,000 next year, it will be taxed at her lower marginal rate.

Answer 1

The couple, William and Helen, can benefit from William contributing to Helen's RRSP as it will be taxed at her lower marginal rate upon withdrawal in retirement.

Step-by-step explanation:

William and Helen are a common law couple who contribute regularly to their RRSPs. With William's annual contribution limit being $10,000, and Helen's at $4,000, a strategic approach to their retirement planning is identified. Considering that William will have a higher marginal rate than Helen in retirement, if William contributes $10,000 to Helen's RRSP, the primary benefit will be in the form of tax savings.

As for the options provided:

1. The benefit will be realized in retirement because withdrawals will be taxed at Helen's lower marginal tax rate. This allows the couple to save money on taxes as they are pulling from the lower income individual's account.
2. William cannot make an additional $10,000 contribution to his own RRSP because he is limited by his own annual contribution limit.
3. If Helen withdraws the $10,000 next year, and assuming she remains at a lower tax bracket, it will indeed be taxed at her lower rate.

So, the correct option for the couple to realize a benefit is 'a': The benefit will be realized in retirement because withdrawals will be taxed at Helen's lower marginal tax rate.